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At this point, a firm must often choose how to access financial capital. It may choose to borrow from a bank, issue bonds, or issue stock. The great disadvantage of borrowing money from a bank or issuing bonds is that the firm commits to scheduled interest payments, whether or not it has sufficient income. The great advantage of borrowing money is that the firm maintains control of its operations and is not subject to shareholders. Issuing stock involves selling off ownership of the company to the public and becoming responsible to a board of directors and the shareholders.

The benefit of issuing stock is that a small and growing firm increases its visibility in the financial markets and can access large amounts of financial capital for expansion, without worrying about paying this money back. If the firm is successful and profitable, the board of directors will need to decide upon a dividend payout or how to reinvest profits to further grow the company. Issuing and placing stock is expensive, requires the expertise of investment bankers and attorneys, and entails compliance with reporting requirements to shareholders and government agencies, such as the federal Securities and Exchange Commission.

Key concepts and summary

Companies can raise early-stage financial capital in several ways: from their owners’ or managers’ personal savings, or credit cards and from private investors like angel investors and venture capital firms.

A bond is a financial contract through which a borrower agrees to repay the amount that was borrowed. A bond specifies an amount that will be borrowed, the amounts that will be repaid over time based on the interest rate when the bond is issued, and the time until repayment. Corporate bonds are issued by firms; municipal bonds are issued by cities, state bonds by U.S. states, and Treasury bonds by the federal government through the U.S. Department of the Treasury.

Stock represents ownership of a firm. The stock of a company is divided into shares. A firm receives financial capital when it sells stock to the public. A company’s first sale of stock to the public is called the initial public offering (IPO). However, a firm does not receive any funds when one shareholder sells stock in the firm to another investor. The rate of return on stock is received in two forms: dividends and capital gains.

A private company is usually owned by the people who run it on a day-to-day basis, although it can be run by hired managers. A private company owned and run by an individual is called a sole proprietorship, while a firm owned run by a group is called a partnership. When a firm decides to sell stock that can be bought and sold by financial investors, then the firm is owned by its shareholders—who in turn elect a board of directors to hire top day-to-day management—and is called a public company. Corporate governance is the name economists give to the institutions that are supposed to watch over top executives, though it does not always work.

Problems

The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the top management of the company? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run?

Got questions? Get instant answers now!

References

National Venture Capital Association. “Recent Stats&Studies.” http://www.nvca.org/index.php?option=com_content&view=article&id=344&Itemid=103Update.

Freddie Mac. 2015. “Freddie Mac Update: March 2015.” Accessed April 13, 2015. http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf.

Former, Jamie D. “Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company.” U.S. Small Business Administration: Community Blog (blog) . Publication date March 23, 2010. http://www.sba.gov/community/blogs/community-blogs/business-law-advisor/should-your-small-business-go-public-consider-0.

Questions & Answers

What's the relationship between scarcity and choice
Beverly Reply
when your income increase your demends increase
Ali Reply
what is the d/ce between cash flow and cash transection?
Ali
purchase power is demand or decrease in quantity of products in market as shortage is demand....
Baryali
urchase power is demand or decrease in quantity of products in market as shortage is demand...
Baryali
what is demand
Gabriel Reply
Demand refers to the quantities of product or service that potential buyers are willing and able to buy.
Gcina
is the all your satistaction
Ali
What are the causes of Monopoly
Alex Reply
more price, less quantite
Fermin
is the market which is clossed few people
Ali
Fermin and Ali Yusuf that is the causes of monopoly you people are naming or your are discussing about Demand.which one
Alex
what is national accounting
Ezichi Reply
is GDP good to measure living standard in countries
Samu Reply
When the GDP increase this will lead to high employment, high standards of living, high level of import and export, available of trade barrier
Rnooma
How are you doing today
Tamba Reply
what is price mechanism
Deyin Reply
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services.
Lamin
how can unemployment can be prevented, or the facts to reduce unemployment
Elina Reply
provision of job opportunity
Bernice
is by creating job facilities
Lamin
Hi
Jonathan
yeah how are you doing?
Lamin
Hello
Esther
Am fine
Esther
yeah
Lamin
More vocational and technical institutions
Perthra
non motivational community
Ifraah
How are you doing today my dear
Tamba
Great
Peter
by providing adequate job facilities
Akosua
well
Daniel
principle of economic
Atinga Reply
what is elasticity
Bernice Reply
economic
sonu
A measure of the responsiveness of one variable to a change in another.
Ousmatu
if the %± (change) in quantity demanded exceed the %± in price
muhammed
type of demand
Usama
what is the different between money market and capital market
Kevin
What is a budget constraint?
Nsonga Reply
A budget constraint refers to all the combination of goods and services that can be purchase by a consumer.
Bernice
What is economics
Haftamu Reply
Economics is the study of how human beings make decisions in the face of scarcity.
Nsonga
Hello my fellow colleges...
Blessful Reply
Hello
Nsonga
good morning
Samuel
what is demand?
Abdish
Demand is the combination of the consumer's needs, wants and expectations
CIISE
thank you.
Abdish
good evening
Bernice
evening hope everyone is okay
Qwa
what is demand
KING Reply
what is demand
Ntwanano
Demand is an economic principle that refer to consumer purchasing goods and services and they are willing to pay price for specific goods and services increase in goods products this will lead to decrease the amount of demand am I right?
Rnooma
you try..
Blessful
Sorry
Rnooma
Demand refers to various quantity of a commodity that consumers are willing that able to buy at various price within a given period of time
Bernice
Yes.. yes correct.
Blessful
what is demand
Addea
Demand refers to the willingness and ability of consumers to purchase a given quantity of a good or service at a given point in time or over a period in time. In economics, demand is formally defined as ‘effective’ demand meaning that it is a consumer want or a need supported by an ability to pay
Adorer
Demand= wants+needs+expectations
CIISE

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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